Small-cap index enters bear territory
The Nifty Smallcap 100 Index, a gauge for the performance of companies with market capitalisation of $1 billion, has slipped into bear-market territory. The index is down 20 per cent from its peak, touched in mid-January. The index has slipped more than 9 per cent in May, and is on course to posting its worst monthly drop in over 18 months. The performance of the Nifty Midcap 100 Index, which consists of companies with a market cap between $1.5 billion and $4 billion, is equally bad. The index is down 15 per cent from its peak in January, and is down 8.5 per cent, singularly, this month.
A 20 per cent decline in price of a security from its recent high is considered to be a bear market.
The performance of the benchmark Nifty is papering over the carnage in the smalland mid-cap space. The 50share index is down just two per cent this month, and has come off 5 per cent from its peak.
The broader market sell-off is so severe that 185 of the 1,759 companies traded on the National Stock Exchange (NSE) have lost more than half their value this year. Nearly 60 per cent of the NSE-listed stocks have lost a third of their value.
"Due to a worsening macrosituation, investors are moving into safer zones," says Ravi Muthukrishnan, head, institutional equity research at Elara Securities.
The shuffling of stocks by equity mutual funds to comply with the new categorisation norms has partially led to the fall. But experts have attributed micro headwind (such as the weakening of the rupee, surging bond yields, and rising fuel prices) as the real issue spooking investors.
The top 10 losers in the Nifty Smallcap Index have lost more than 40 per cent since January 15, when the index touched a record high. Reliance Naval and Engineering, Hindustan Construction and Reliance Communications have plunged over 60 per cent each. Stocks such as Jet Airways, IFCI and Allahabad Bank have crashed nearly 50 per cent each. The components of the Nifty Midcap Index have plunged even lower. Vakrangee, PC Jeweller and Adani Power are down 89 per cent, 72 per cent and 53 per cent, respectively.
"The valuation premium of mid-caps and small-caps over large-caps was very high. We were expecting the premium to come down substantially. We are seeing that play out now," he said.
The sharp fall in some of the stocks has caught several money managers off guard. A lot of funds focused on small- and mid-cap stocks are staring at huge losses.
Experts say the stocks in this space could correct further as investors will try to shift to large-caps, which are holding ground.
"We expect mid-caps to further fall as investors switch to large-caps. However, one should not completely ignore this space. The recent falls also provide an opportunity to buy quality mid-caps," said Muthukrishnan.